Natural Gas: Shifting into a Higher Gear

by: Mike Whitlatch, VP of Global Energy and Procurement at UPS

After spending the first 80 years of our company’s history growing our dependence on petroleum, UPS has spent the last 30 years searching for something better. As part of what we refer to as our “rolling laboratory,” we have tested electric vehicles, hybrids (both electric and hydraulic) and vehicles powered by propane and natural gas.

Increasingly, we are turning our attention to natural gas, which has the potential to revolutionize trucking, create jobs, enhance our nation’s energy security and contribute to a cleaner environment on a scale much larger than we are seeing currently.

UPS introduced the first liquid natural gas/diesel-powered tractors to our U.S. fleet in 2002. But the move to natural gas vehicles lost traction for our company and others a few years later when domestic natural gas supplies decreased and prices surged.

Many in the transportation industry began to doubt that the cost of natural gas would remain low enough to become a viable alternative vehicle fuel.

Since then, however, we’ve seen an enormous expansion in U.S. natural gas production and increases in natural gas reserves.

This reversal of market conditions has created new confidence that natural gas supplies and prices will remain attractive, at least for the foreseeable future, when compared to diesel prices.

Natural gas at $5 per million British Thermal Units is equivalent to crude oil at $29 per barrel, well below oil’s current market price. It must be pointed out, though, that this price differential can be deceptive.

Because it costs more to convert natural gas to a transportation fuel (either CNG or LNG) and because of the additional specialized fueling infrastructure costs, natural gas isn’t as cheap as it might appear.

Any cost calculation also must consider the fact that alternative fuel vehicles themselves are more expensive than their conventional counterparts.

In addition to its cost advantages, natural gas when used as a transportation fuel stimulates the economy and innovation. It creates jobs to satisfy demand from the transportation sector and spurs investment in technology and manufacturing infrastructure from engine and truck manufacturers.

The environment also wins big with natural gas, which burns cleaner than diesel or gasoline.

Benefits vs. Cost

Despite those attractive benefits, cost ultimately will determine the widespread acceptance of natural gas. Natural gas advantages will be seen in three areas: 1) the price differential between trucks powered by alternative fuels and conventional vehicles, 2) lower-cost petroleum fuels and natural gas fuels (especially when LNG is compared to diesel fuel) and 3) taxes.

Currently, transportation companies pay more for an alternative-fuel truck than we pay for a conventional diesel truck. The price difference for a class 8, 18-wheeler, for example, has come down from about $100,000 per truck to roughly $65,000 per truck in recent years.

The question for every business contemplating shifting to alternative fuel vehicles is whether the savings in the price of the alternative fuel (compared to conventional fuels) will be enough over time to offset the extra initial cost of the alternative fueled vehicle? That’s where taxes come into the picture.

The federal excise tax on both diesel fuel and LNG – which is determined by volume – is 24.3 cents per gallon. Yet, a gallon of LNG produces only 58% of the energy produced from a gallon of diesel.

In short, LNG is effectively taxed at 170% of the rate of diesel fuel on an energy-equivalent basis. That means LNG is being taxed an additional 17 cents per equivalent gallon more than diesel fuel.

That extra 17 cents adds up over the life of the truck to more than the extra initial cost of an LNG truck over a new conventional diesel truck. In short, the extra tax burden on LNG fuel is a bigger impediment to our buying LNG trucks than the incremental initial cost of the LNG truck itself.

We share the belief of many that since LNG is a substitute for diesel, both should be taxed at the same rate on an energy equivalent basis.

If the Congress wants to accelerate the adoption of LNG heavy trucks and their use of domestic natural gas and clear a path to the benefits we have discussed, it must fix the LNG “glitch” in the tax code. It has the opportunity to do that by passing the LNG Excise Tax Equalization Act of 2013.

In addition to the higher original cost of natural gas-powered alternative fuel vehicles when compared to a conventional diesel truck, a 12% Federal Excise Tax for heavy-duty trucks is applied to the total purchase price of the vehicle.

This means that anyone purchasing an alternative fuel vehicle is required to pay extra taxes for doling what most would agree is a good thing.

For example, 12% on the $70,000 incremental cost of a natural gas truck results in $8,400 in additional taxes when compared to a diesel powered truck.

All for investing in a vehicle that uses a domestic fuel, creates jobs here in America and makes for cleaner air. We don’t believe that makes sense.

Before all of its potential as an alternative fuel source can be unlocked, natural gas must overcome some significant roadblocks. Congress could act decisively to begin removing these obstacles and clear the way to greater economic vitality, more jobs and a more sustainable future. 

This article was adapted from testimony before the Senate Finance Subcommittee on Energy, Natural Resources and Infrastructure given on December 3, 2014.